Cost Performance Index (CPI) in Project Management: Explained

Managing projects always involves dealing with expenses. 

Therefore, monitoring cost performance is vital to completing your project successfully. 

But, how can you do it properly?

In this guide, we will define the cost performance index (CPI) and explain how to determine it for your project. 

To make it clearer, we will provide easy-to-understand examples for project management CPI variations.

Let’s get started.

Cost performance index (CPI) definition

The cost performance index (CPI) measures the project’s financial performance and the cost efficiency of budgeted resources.

As a cost-efficiency measure, CPI shows how effectively the project sticks to its budget. 

Why do we need it?

Whether we like it or not, project costs are not set in stone. 

We must track the project’s cost performance, as expenses may change during its progress.

The latest Pulse of the Profession® report reveals that 62% of global projects in 2021 were completed on budget. 

However, the remaining 38% of the projects did not meet the expected costs.

The cost performance index helps us identify if our project expenses are as planned or whether we are performing over or under the budget.

📖 Curious about more performance indicators like CPI that will tell you how your project is doing? Visit our Project Management Glossary of Terms and explore the different earned value management and project management concepts in more detail.

Let’s find out how to calculate the cost performance index (CPI).

How to calculate CPI in project management

The CPI in project management is an earned value (EV) ratio to actual cost (AC).

To determine its value, you should use the following cost performance index formula:

CPI = EV / AC

First, you should calculate earned value (EV) and determine the actual cost (AC).

Earned value (EV) represents the completed work, while actual cost (AC) shows how much money you have spent on project work to a point in time.

Term	Calculation
Earned value (EV)	% work completed x budget
Actual cost (AC)	the amount of money spent on the project work to a point in time

To calculate the earned value (EV), use the following formula:

EV = % work completed x budget

How can you establish whether your project is progressing as planned or if you are overspending?

Let’s take a look at the following table:

CPI value	Meaning
CPI is over 1	Your project performs under the planned budget.
CPI is 1	Your project performs as planned.
CPI is less than 1	You are spending more than planned.

For example, a CPI of 0.5 indicates you have spent twice the sum you should have by a certain point in time.

On the other hand, a CPI of 2 means you have spent only half the sum you should have at this point.

The value of CPI is also one of the metrics we use to calculate the estimate at completion (EAC) for our project. 

Estimate at completion (EAC) is the forecast of the project budget at its completion that we calculate while the project is in progress. 

When the cost performance index (CPI) value indicates that we are overspending, calculating the estimate at completion (EAC) comes in handy to reveal the amount of money we will actually spend on our project.

To sum up, the CPI value is an important indicator of how much we are spending on project activities.

Cost performance index (CPI) examples

Whether you are managing a small project team, leading a game development project, or planning a nonprofit event, you should always track cost efficiency.

To make everything easy to understand, let’s provide examples of the following scenarios:

• CPI less than 1
• CPI of 1
• CPI over 1

Example #1: CPI less than 1

Suppose your project team is working on a product launch.

The project budget is $100,000, and 50% of the planned work has been completed. 

Your team has already spent $70,000 on project activities, and you want to check whether the costs align with the initial plan.

First, you need to determine the earned value (EV). 

To do so, you can use the following EV formula:

EV = % work completed x budget

EV = 50% x $100,000

EV = $50,000

The actual cost (AC) is $40,000 — the sum already spent on project activities.

To calculate cost performance index, divide the earned value (EV) by the actual cost (AC).

CPI = EV / AC

CPI = $50,000 / $70,000

CPI = 0.71

The cost performance index (CPI) value is 0.71, which means you are overspending.

Example #2: CPI of 1

Suppose you are responsible for game project management, and your team is in charge of game development.

The project budget is $150,000, and 50% of the planned work has already been completed. 

Your project team has already spent $75,000 on project activities.

EV = % work completed x budget

EV = 50% x $150,000

EV = $75,000

The actual cost (AC) is $40,000, which is the sum already spent on project activities.

To cost performance index is an earned value (EV) ratio to actual cost (AC).

CPI = EV / AC

CPI = $75,000 / $75,000

CPI = 1

The cost performance index (CPI) value of 1 means project costs are as planned.

Example #3: CPI over 1

A company XYZ is in charge of corporate event planning for their client X.

The project budget is $150,000, and the project team has done 40% of the planned work. They have already spent $45,000 on project activities.

To determine the CPI, we should know the values of the earned value (EV) and the actual cost (AC).

EV = % work completed x budget

EV = 40% x $150,000

EV = $60,000

We already know how much the project team has spent — $45,000, which is the actual cost (AC).

CPI = EV / AC

CPI = $60,000 / $45,000

CPI = 1.3

As you can see, the CPI is greater than 1 —  meaning we are doing well budget-wise.

How to monitor cost performance in project management software

Maybe you already have a project checklist you use on a daily basis.

However, tracking finances is a serious task requiring more than just a checklist.

You should monitor any change in spending and act timely to avoid unpleasant surprises.

To ensure you have all budget-related information in one place, we recommend using project management software like Plaky. 

With Plaky, there are no extra costs, as it offers all the functionalities project managers need completely free.

But, how do you use project management software to monitor cost performance?

Let’s provide an example.

In Plaky, you can have a dedicated board for tracking the cost performance index (CPI). 

A board is a space in which you can manage your tasks.

Creating a new board is simple. 

Find the +add button in your space and click on new board. 

After adding a new board, you can customize it to suit your needs.

You may want to start by listing all the project costs.

Then, we recommend adding tags to specify departments responsible for particular expenses.

Tracking status becomes easier with the status field option. 

You can create custom statuses and choose the colors of your preference for each of them.

Last but not least, you can create fields for the following: 

• Project costs, 
• Actual cost (AC), 
• Earned value (EV), and 
• Cost performance index (CPI). 

When all set, your cost performance index (CPI) board may look like this:

You should always monitor the project’s cost efficiency

Costs can change as your project progresses. 

Measuring financial performance and cost efficiency can make a difference between a project’s success or failure. 

You can use the cost performance index (CPI) to help determine how your project progresses using budgeted resources.

The CPI value may indicate: 

• Spending as planned, 
• Spending less than planned, or 
• Overspending.

The cost performance index (CPI) is also used to calculate the estimate at completion (EAC), which we use to determine the project cost at its completion while the project is ongoing.

References

• Project Management Institute. (2021). A Guide to the Project Management Body of Knowledge (PMBOK® Guide)  Seventh Edition and The Standard for Project Management Retrieved September 29, 2022, from https://www.goodreads.com/book/show/58474625-a-guide-to-the-project-management-body-of-knowledge-pmbok-guide-sev?from_search=true&from_srp=true&qid=pSMKWtm0ef&rank=1
• Project Management Institute. (n.d.). The Standard for Earned Value Management. Retrieved September 29, 2022, from https://www.goodreads.com/book/show/45899516-the-standard-for-earned-value-management?from_search=true&from_srp=true&qid=iMx9MFQGVZ&rank=1
• PMI. (2021). Pulse of the Profession 2021: Beyond Agility. https://www.pmi.org/-/media/pmi/documents/public/pdf/learning/thought-leadership/pulse/pmi_pulse_2021.pdf